European debt crisis: Merkel and Sarkozy to thrash out bailout funding

Board members of Franco-Belgian bank Dexia are meeting to discuss its breakup. Photograph: Yves Logghe/AP

The leaders of France and Germany are to thrash out the funding for an expected €200bn (£172bn) bailout of Europe's banks in the latest of a series of meetings about the eurozone debt crisis.

The problems of sovereign debt exposure in Europe's banks came into sharp focus last week with the collapse of Franco-Belgian lender Dexia. After its collapse, a new set of bank stress tests are expected to be conducted by the European Banking Authority, a move that analysts say will heap more pressure on stretched balance sheets.

Some German banks are already reportedly preparing to raise billions from private sources, an option said to be favoured by the German chancellor, Angela Merkel.

However, the French president, Nicolas Sarkozy, is said to want French banks to have access to the €440bn in the European financial stability fund, which was originally set up to finance the rescues of Greece, Portugal and Ireland.

Dexia passed the last set of stress tests just three months ago, but this did not take into account its eurozone debt exposure. A board meeting is being held on Sunday to discuss the bank's breakup, while French and Belgian government officials are said to be finalising a plan to protect depositors. Both countries became part-owners following an earlier bailout in 2008.

Irish finance minister Michael Noonan confirmed on Saturday that some German banks were planning to raise cash from investors. "I know that some of the big German banks I was talking to personally intend raising money on the market," he said, adding that some other banks would also like to access the EU stability fund.

He added that there was "general agreement" that any Europe-wide bank bailout would cost significantly in excess of €100bn.

The International Monetary Fund has estimated that Europe's banks overall need to raise €200bn in new capital to cover possible sovereign debt losses. Germany is said to fear that if French banks use the stability fund it could be overwhelmed as other eurozone countries rush to follow suit.